Marketing Department at Kellogg

  • Julie Hennessy
    Julie Hennessy
    Clinical Professor of Marketing Julie Hennessy Photo © Nathan Mandell

As chair of the marketing department I would like to add my personal welcome to visitors of the department's website.

For decades, Kellogg has been the recognized leader in marketing. Why? Because to us, marketing is more than a function or discipline. It’s a mindset: a way of looking at the world that is customer-focused, insight-driven and ever-evolving. We apply an innovative, multi-discipline, research-based approach to developing and testing new theories and educating the next generation of leaders. The result? Our graduates lead organizations that create new markets and deliver superior customer experiences that produce sustainable growth.

On our website you will find a brief history of the department, bios of the department faculty, descriptions of courses taught in the Master of Business Administration (MBA) program, requirements for completing a major in Marketing, information concerning the Ph.D. program, and executive programs offered by the department.

 Eric T. Anderson
Hartmarx Professor of Marketing
Chair of Marketing Department
Director of the Center for Global Marketing Practice 
Eric T. Anderson

Marketing Research featured in Kellogg Insight

Maximize the Returns, Lower the Risk: Using the right tools to grow savings and improve investment outcomes.

This month, Insight In Person looks at how to incorporate games and game theory into savings and investment strategies.

Ben Iverson, a professor of finance at the Kellogg School, discusses prize-linked savings accounts, which are a novel way to turn people’s love of the lottery into a vehicle for growing personal savings.

James Schummer, a professor of managerial economics and decision sciences at the Kellogg School, discusses how game theory can be incorporated when calculating the risks and rewards of investing.

Willemien Kets, a professor of managerial economics and decision sciences at the Kellogg School, joins the podcast to describe her research into how the wisdom of crowds can help ensure the accuracy of prediction markets.

How to Exploit Your Startup’s Constraints: Good entrepreneurs use their lack of resources to their advantage.

The enthusiasm that David Schonthal has for startups is not based solely on how much funding they might raise, the chance they may come up with a giant-killing innovation, or the potential for a massive buyout from an established firm. Instead, Schonthal, an entrepreneur focused on the health care industry and a clinical professor of entrepreneurship at the Kellogg School, is fascinated by how start-ups exploit their constraints.

“The interesting thing about constraints is how they can be used positively,” Schonthal says.

Let’s face it: given limited funding, a small-if-intrepid staff, and unproven—or even nonexistent—products, most startups have to be creative just to get off the ground. But being small has the advantages of high-speed product adaptability and close contact with customers. Having little funding means throwing money at whatever problems arise is not an option. So other creative solutions arise.

The Lessons of the Yankauer Wand

“A lot of entrepreneurs go out to try to get affirmation or pushback on something that they believe they know to be true,” Schonthal says. “I have worked for startups where we weren’t even asking the right questions or doing the right research. We never really went through the exercise of asking, ‘what assumption is the whole business hinging on?’”

Failing to answer that core question can lead startups to spend time solving problems that are not really problems at all, as Schonthal came to learn in the course of one of his early ventures, a medical-device company. This company developed a holster for a disposable Yankauer wand, which is used to suction out the respiratory systems of unconscious patients. The wand is important, but it typically had no designated resting place in a care setting. As a result, nurses and doctors tended to store the wand under the patient’s pillow or dangle it off the side of the bed, neither of which is hygienic.

“In the early days, you go out to learn, not to validate.”

Armed with the assumption that the device needed a designated home when it was not in use, Schonthal’s company poured money into sales force–led research to prove the need for the product. But they asked the wrong question—essentially, “wouldn’t it be great if this holster existed?” They realized later that all those nurses and doctors who told them, “sure, it would be great,” were telling the truth. But they were also not ready to incorporate a new habit—putting the wand into the holster after each use—into their rounds. That disconnect between what people say and what they actually do posed a huge problem for the company.

Since people are creatures of habit, asking them to change their behavior can be a huge obstacle, no matter how convincing the data may be. The experience of the Yankauer wand has led Schonthal to be aware of users’ ingrained habits when thinking about innovation, rather than creating devices that require users to adopt new ways of working.

Let Go of Certainty

Being convinced of a great idea is crucial to getting a company off the ground. But certainty can also limit flexibility. A startup has to question everything about itself—from the nuances of product development to core existential questions about whether or not the business even solves a worthwhile problem.

It has taken Schonthal years to learn how to incorporate his own blind spots into the way he researches and tests the products he hopes to bring to market. Some of these blind spots have turned out to be fundamental to reasons the products were conceived.

So how does an entrepreneur figure out the right questions to ask? One way is to use the constraint of a small staff as an advantage. Most startups have no choice but to be close to their customers.

“In the early days, you go out to learn, not to validate,” Schonthal says. “Be really honest with yourself: you don’t go out to sell and scale as quickly as you can. Rather, you reduce the size of the experiment to be just big enough to answer some key questions, and do anything you can to get the thing in people’s hands so you can watch how they use it in the wild.” This allows for the kind of authentic feedback that only users can provide.

Observing how people interact with a product may lead to some very important, if painful, realizations: that you misinterpreted who your customer are, how the value proposition resonates with them, or whether they care about your product at all.

The Risks of Growing Up

One great advantage startups have over established companies stems from the size and funding constraints most startups share. In the absence of the budget it would take to hire an R&D team, the founders themselves spend time in the field gathering information. “When you’re small, everybody’s interfacing with customers every day, talking to them. When you hear feedback from the market, the whole team is hearing the same thing.”

“By the time customer information reaches the innovation department of a large company, it is usually presented as statistically significant survey results,” Schonthal says. “Thousands of people now become one synthesized voice of some artificial customer archetype—‘Meet Joe. Joe is a 35-to-37-year-old urban male who makes $65,000 to $75,000 per year and has 1.5 kids’—these kinds of abstract representations of real people.”

While useful for established companies, that kind of synthesized, humanized data is less valuable to entrepreneurs in early testing than hearing the voices of the individuals who are using the prototype. This feedback has a different value: it can clue the company into the motivations, emotions, and behaviors of the user and may reveal the true utility of the product in question. But knowing how to interpret what you hear—and knowing what questions to ask—can be a tall order no matter how big or established your company.

“If you go right to secondary data and focus groups, you lose that ability to walk into the clinic and see somebody shove the Yankauer wand under the pillow,” Schonthal says. “That kind of information doesn’t typically get translated through spreadsheets, charts, and reports. You have to be there to see it and understand why people are doing what they do. Understanding the ‘why’ needs to be the first step in creating a better ‘what.’”

Using the Lure of a Lottery to Spur Savings: Now legal in the US, prize-linked savings accounts use the excitement of a jackpot drawing to encourage people to grow savings.

Benjamin Iverson gets one of two distinctly different reactions when he tells people about his recent research into prize-linked savings (PLS) accounts. The accounts, which are popular overseas, accrue little to no interest. Instead, account holders get entered into jackpot drawings, earning more chances to win as they invest more in the account.

“One reaction is, ‘This is the greatest idea ever! We’re going to help people save,’” says Iverson, an assistant professor of finance at the Kellogg School of Management. “The other reaction is, ‘Are you crazy? We’re going to trick people into gambling instead of saving? That’s a terrible idea.’”

Iverson himself was firmly in the second camp before he began his research. After crunching the numbers, he changed his mind.

“I’ve really come around,” he says.

He was convinced through his research, which shows PLS accounts attract new people into the banking system who do not have other savings accounts. And those account holders increase their savings by more than the average across all types of savings accounts, including standard accounts. Additionally, PLS accounts appear to reduce the number of people who buy lottery tickets.

In other words, PLS accounts offer an attractive alternative to a particularly financially vulnerable population—those with no savings who are one large medical bill or car wreck away from fiscal disaster—while decreasing overall spending on lotteries, where the vast majority of people reap no benefit.

“Can we get people sitting outside the savings system to come in and then move toward more traditional products?”

Iverson is not the only one who has been convinced. In December, President Obama signed into law a bill that makes PLS accounts legal in the U.S. Previously, they had only been allowed in a few states through credit unions, whose pilot programs were quite successful. The new federal law does not override any current state laws that prohibit the accounts, so states can still opt out if they want.

Iverson says he expects to see the accounts become very popular in the U.S., just as they were in South Africa. “There are cultural differences, but in terms of how much we like to gamble, we’re just like everybody else in the world,” he says. “We love to gamble.”

The attractiveness of PLS accounts is tied to the idea of a “poverty trap,” Iverson says. For the impoverished, tiny incremental interest payments are not going to make a dent in their debt. “They need a bigger chunk of money and they’re actually willing to give up the sure thing [of interest] to have a chance at the bigger chunk of money,” he says. “And, if they don’t get it, they’re really not that much worse off.”

A New Area of Study

There has been virtually no research into PLS accounts, even though they have been around for more than 100 years and are a popular in much of the world. Iverson knows of only a handful of studies that have looked at them.

So, when a professor of his wrote a case about PLS accounts based on the experience of a large South African bank, Iverson was intrigued. After Iverson mentioned his interest, he and his professor, Peter Tufano, who is now at the University of Oxford, and Tufano’s case study coauthor, Shawn Cole at Harvard, looked at the underlying data from the bank in order to study the accounts in more detail.

The data come from First National Bank, one of South Africa’s largest, which started offering PLS accounts in 2005. It was called the “Million-a-Month Account,” because of the million-rand jackpot, and nicknamed MaMa.

One randomly selected MaMa holder each month was awarded the grand prize, which was announced on national television. The bank also gave out a number of smaller prizes monthly.

The bank ended the MaMa program after three years because the country’s supreme court deemed it a violation of the Lottery Act. The program’s abrupt end was unfortunate for the researches, Iverson explained, because they were not able to tell what the saturation point looked like in terms of people losing interest in opening new accounts. The MaMa program was still growing steadily when it was shut down, meaning people’s odds of winning were getting smaller and smaller. Iverson would have liked to see at what point “people would have said, ‘my chance is too small now. I’m going to go into a regular account or I’m going to play the lottery’” or do something else with their money.

Still, one interesting and encouraging statistic emerged because of the program’s termination: when the MaMa accounts closed and the bank converted the accounts into traditional savings accounts, 77 percent of people kept their money in those new, non-PLS accounts.

PLS Accounts Build Buzz and Savings

An analysis of the bank’s data shows a number of clear benefits of the MaMa program in terms of incentivizing savings.

First off, the program was incredibly popular. Though the total amount of money in the PLS accounts was less than what was held in traditional savings accounts, the raw number of PLS accounts eclipsed traditional savings accounts within 18 months.

Among the information the bank supplied was anonymous data about its employees. In analyzing this, the researchers found that employees with no other accounts at the bank were 4.6 percent more likely to open a MaMa account. And those who had borrowed a large amount from the bank were nearly 18 percent more likely to open a MaMa account.

Iverson had expected to find that MaMa accounts were simply cannibalizing money away from traditional savings accounts. But the researchers found no evidence that MaMa account holders took money from their regular accounts to feed money into the MaMa program.

MaMa account holders saved at a faster rate than the average across all savings-account holders at the bank, to the tune of roughly 1 percent of annual income more. This equates to a nearly 40 percent increase in total savings for MaMa account holders. And MaMa account holders who also had traditional savings accounts increased their savings in those traditional accounts as well.

The researchers also found some interesting behavior among the 4,341 MaMa prizewinners.

Those who won prizes both large and small kept substantially more in their MaMa accounts than non-winners, even a full year after they won. For some, their savings increased by more than the amount of their prize.

Iverson believes this can be tied to the excitement of winning—a “self-generating effect” so to speak. Once bitten by the PLS bug, account holders wanted to increase their chances of winning again by keeping more money in their accounts.

It was not just the prizewinners themselves who caught PLS fever. There was a distinct buzz effect for the branches that awarded the million-rand prizes. In the month following a jackpot-winning drawing at a particular branch, that branch would see a nearly 90 percent increase in the growth rate of deposits in MaMa accounts compared with a typical month. And non-MaMa savings accounts got a boost from a local winner, too. There was a 4 percent increase in the balances in traditional accounts in the month after a local winner was announced.

It is not hard to see how this buzz is generated.

“When I get interest from my bank, I don’t go tell you that I got 45 cents,” Iverson says. But he would likely be singing from the rooftops if he won a jackpot prize.

Lottery Use Down

In addition to encouraging more savings, the MaMa program appeared to reduce participation in the lottery. The researchers base this conclusion on the fact that when the national-lottery jackpot was especially large because the jackpot was rolled over from the previous draw, deposits in MaMa accounts slowed. They then picked up again when the jackpot amount fell.

While some of the savings in MaMa accounts likely came from money that was not spent on lottery tickets, Iverson would like to know more about where the rest of it came from. He knows people were not taking money out of other savings accounts. But the funds deposited in prize-linked savings—where there had not been savings before—had to come from somewhere.

“Are they hurting themselves somehow or are they reducing frivolous things?” he wonders.

Converting to Long-Term Savers

While the PLS accounts are a great entry into the banking system and can build up an important precautionary savings, they are not a replacement for long-term savings accounts such as a retirement fund. PLS accounts may be a good tool to get non-savers into a bank, but Iverson would like to know whether they can be converted into more traditional savers who would benefit from compound interest.

“Is this a gateway to more long-term savings?” Iverson wants to know. “Can we get people sitting outside the savings system to come in and then move toward more traditional products?”

A big part of this potential transition to traditional savings accounts, including in the U.S. now that PLS accounts are legal, is the question of how much banks encourage customers to move from PLS accounts to more traditional ones that earn interest.

“I don’t see banks having a huge incentive to do that,” Iverson says, given that the PLS structure is cheaper for them than paying interest.

But even without these answers, Iverson, the former PLS skeptic who has never been a gambler himself, would encourage those who play the lottery and lack savings to open a PLS account.

“Even if they stop at this account,” he says, “they’re better off.”

Keeping Employees Motivated in the Absence of Promotions: Other incentives can keep employees happy in flat organizations.

Sure, the satisfaction of doing a good job can sometimes be enough to push employees to work hard. But often it is the lure of that next good job—a promotion, and the raise and bigger office that come with it—that drives them to excel.

The opportunity for advancement, as any employee or manager knows, is a great way to motivate employees. Firms do not simply hand out promotions to any employees doing good, or even outstanding, work, however: they are constrained by their organizational structure, the makeup of their existing employees, and company policies limiting the number or timing of promotions.

“A firm’s organizational chart is going to impact workers’ career paths through the personnel policies it enables the firm to put in place,” says Jin Li, an assistant professor of strategy at the Kellogg School. And while the chance of promotion is a boon for employees and an incentive to keep them loyal to an employer, he says, a lack of opportunity will drive talented workers elsewhere.

How can companies make sure their workers are motivated even when there are not plentiful promotions to hand out? Li teamed up with Michael Powell, also an assistant professor of strategy at the Kellogg School, and Rongzhu Ke, at the Chinese University of Hong Kong, and built a mathematical model to investigate how companies can best use promotion policies, given their organizational constraints.

“When the job offer itself is already pretty good, the promotion is less important.”

The model was based on previous research that emphasized that workers may be motivated by the fear of losing high-paying jobs. But the researchers observed that firms’ personnel policies are richer than their wage policies alone. So, they asked, how can firms work around their promotion constraints by manipulating salaries or other perks, like stock options, to keep workers motivated if opportunities for promotions are scarce?

Opportunities Worth Working For

Promotion really is the most effective way to motivate workers, their model confirmed. When employees are striving to move up the career ladder, Li says, “the firm can get the workers to do well while paying the lowest amount of money.”

Their model shows that it can be cheaper to motivate workers with career advancement rather than with cash. This is surprising, because one of the main reasons why workers value promotions is that they come with a pay bump. A key insight of Li, Powell, and Ke’s model is that the higher pay in higher positions serves two purposes: it motivates the higher-level employee to work hard to keep that job, and it motivates lower-level workers to work hard to eventually get that job.

But promotions do not happen in the same way, or with the same frequency, at every company. Firm-level differences, like its size and organization, can impact individual workers’ careers, Powell says. “A worker will have a different career experience at a different employer, even though at the beginning of her career, she might not care which firm she works for,” he says.

The size of a company, the model suggested, matters quite a bit—especially because larger companies tend to have what Li and Powell call larger spans, meaning more employees at one rung of the ladder for each employee at the rung above. Take law firms as an example: small firms generally have fewer associates under each partner than larger firms.

That means that in smaller companies, with smaller spans, each associate has a fairly good shot at making partner—or, in non–law firm terms, each entry employee has a sizable chance to become a manager. Because of that, wages can stay relatively low: associates can reasonably assume they will become partners, and get the benefits that come with that, later in their careers.

In larger firms, however, with more entry-level employees per manager, it is more difficult to get one of the few top spots. What can companies do, then, to keep workers motivated? Put simply: pay them more.

For one thing, the salaries of the entry-level employees will be higher. “When the job offer itself is already pretty good,” Li explains, “the promotion is less important.” And the salary for the managers goes up, too. Since workers are not as likely to get promoted, the firm has to dangle a more appealing carrot—in this case, a much larger salary—to keep them working hard and hoping to move up.

Another way to make sure that the opportunity for advancement keeps motivating workers is for big companies to force turnover higher up the ladder. Investment banks, for instance, often buy out a portion of their partners each year—even if those partners are still doing productive and profitable work—to make room for younger employees to advance. The fact that top jobs will open up more frequently helps motivate more junior workers—but it has a downside too. Knowing that the top job has a limited tenure can make it less valuable (and less enticing) to younger workers, so firms have to compensate for that, too, with higher wages after a promotion.

Keeping a Clear Path Ahead

Promotions are the most motivating when the next step upward is never too far out of reach. How can flat organizations—with very few opportunities for promotions between a team’s entry-level and top jobs—keep employees engaged and working hard?

Li and Powell’s model has a few implications for such companies. The first is that growth can provide new opportunities—think of early employees at a start-up, who start out in junior roles and are soon running their own teams. “Firms that are expanding are going to find it easier to use career-based incentives,” Powell says. “When the firm’s growth starts to level off, you have to adjust expectations, because you have significantly less flexibility.”

Firms that are not growing may have to compensate for the lack of advancement opportunities in other ways. “In order to motivate workers, you might want to give stock options or award bonuses more,” Li says. Checks and balances within a flat organization, and long-term incentives like stock options, can help ensure that employees are making choices to benefit the company in the long run—and not simply creating a short-term improvement to earn a bonus.

It is also important for every company to remember that promotions do not happen in isolation: they are tied in with a firm’s policies, salaries, and org chart. Additionally, it is important to keep opportunities for individual workers in mind when making offers and structuring teams.

“If you’re going to promise people that if they work for you for three years they’re going to get promoted, you need to make sure that you need people at higher-level positions three years from now,” Powell says. “When you’re managing your workforce, you need to manage the careers of the workers themselves.”

Marketing Department News

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